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August 26, 2014

What Could Keep S&P Above 2,000?

Investment experts like Jeremy Grantham point to the factors driving stocks higher — at least for now

Is this a bubble or a "very steady rally?"

The S&P 500 enjoyed its second day above 2,000 on Tuesday, as the markets digested the belief that the Federal Reserve and other central bankers won’t raise rates until labor markets are in better shape. (The S&P closed Tuesday at 2000.02, beating the 1997.92 close of Monday, Aug. 25, when it crossed the mark with an intraday high of 2000.24.)

This development has investment experts predicting further market gains.

Janney Montgomery Scott analysts, for instance, see growing corporate profits and low inflationary pressures as arguments for easy monetary policy. The major cyclical components of the economy “are far from overheating, providing a sweet spot for stocks,” according to Mark Luschini, Janney’s chief investment strategist.

“We think the market is going higher,” said Ari Wald, Oppenheimer’s head of technical analysis, in an interview on MSNBC Monday. “We were buyers in early August, and we are still buyers.”

This thinking shouldn’t come as too much of a surprise to market watchers.

In May, Jeremy Grantham, co-founder and chief investment strategist of Grantham, Mayo, Van Otterloo & Co., outlined his view that the market most likely won’t see a major turn until after the S&P 500 hits a high of 2,250, but then the bulls could take over and pound investors — mostly like in late 2016.

(The investment guru suggests advisors watch two key statistics: Tobin’s Q, which tracks the relationship between the U.S. stock market value to U.S. net assets at their historic replacement cost, and the Shiller P/E ratio of current stock prices and those of the last 10 years of inflation-adjusted earnings.)

The SPDR S&P 500 (SPY) has been above its 100-day moving average all year, says Wald. “Does it continue to move higher? All the indicators say yes,” he told MSNBC, pointing to the relative ratio between high-beta and low-volatility stocks.

Market experts point to Fed Chairwoman Janet Yellen’s preference for low interest rates as a support for labor markets and strong corporate earnings.

“Most of the measures of prospective [economic] growth showed improvement” last week, according to Tom Stringfellow, president and chief investment officer of Frost Investment Advisors, in an outlook report released on Tuesday.

Stringfellow adds that the Future General Activity Index just hit its highest level since June 1992. “This upturn in optimism was also reflected in the New York Fed's Business Leaders Survey, with one component of the index rising to a four-year high,” he explained.

While Grantham says 2,250 puts the S&P in bubble territory, Stringfellow says we are seeing “a very steady rally.” He notes that this is the fifth-longest rally above the 200-day moving average since the late 1920s.

In addition, the S&P has “more than tripled from its below-700 point low of Q1 2009, and what is striking is the degree of skepticism with which this rally has been viewed,” Stringfellow notes.

Investors, he explains, are having trouble keeping up with the market movement.

Gallup’s latest investor survey, conducted for Wells Fargo (WFC), found that in 2013, when the S&P returned more than 30% and small caps nearly 40%, less than 10% of investors responded correctly to questions about its performance. “In fact, more than 1/3 of investors thought that equities went down in 2013, or were flat, or did not know!” Stringfellow said.

In other words, they may not be piling into today’s market, given their misunderstanding of what happened last year.

Plus, Wall Street is not bullish, he says. The current Street recommendation for stock allocations is currently at a below-average 50%.

The CIO also points to the flow of money into stocks being well off what it was during the tech bubble of the late 1990s.

“The bottom line as we see it: Bubbles typically arise in periods of euphoria, not in the tedium of apathy as we are currently seeing,” he explained. “Even Wall Street is cautious, with most Street strategists expecting modest single-digit returns over the next 12 months.”

That means investors should expect a “choppy period, followed by what could be the best six months in the four-year [election] cycle.”

As for which sectors to focus on, Janney's Luschini favors technology, energy and financials. He's also optimistic on housing and even more bullish on healthcare equipment.

"Medical equipment stocks are on the cusp of breaking out of their four-year narrow trading range," he said in a report on Tuesday. "Companies have spent the last few years in retrenchment mode, implying that faster revenue growth should have a positive impact on profit margins."

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